I am a Managing Partner at Brookside Strategies, LLC, an energy and utility management consulting firm based in Darien, Connecticut. I've spilled blood, sweat and tears grappling with the full spectrum of barriers and misconceptions about distributed generation and energy-efficiency technologies. Previously, I practiced law in New York City at Paul Weiss Rifkind Garrison & Wharton, LLP and Jenner & Block, LLP. I also attended journalism school at Columbia University and earned a JD at Stanford Law School. I've written about energy and environmental issues for Forbes, The Nation, Mother Jones and several other publications. I am the Chair of the Northeast Clean Heat and Power Initiative. Drop me a line - or two - at wmp@cleanbeta.com.

FuelCell Energy Finds Scale in South Korea, Profitability Too?

In 2007, Price Waterhouse Coopers noted a counter intuitive relationship between profitability and sales revenue for publicly-traded fuel cell companies. The more revenue they made, the more money they lost.

“Despite a 59% increase in revenue, the [fuel cell] industry as a whole reported a 74% year-over-year increase in net loss from $371 million in 2005 to $644 million in 2006,” PwC concluded in the 2007 Survey of Public Fuel Cell Companies.

The culprit, according to the same PwC analysis, was lack of scale.

“Without the economies of scale achievable through volume manufacturing processes, the unit production costs in this largely pre-commercial industry remain high.”

Five years after PwC’s grim prognosis, FuelCell Energy, a leading fuel cell manufacturer based in Danbury, Connecticut, has found the secret to scale in South Korea and is reportedly approaching profitability for the first time, according to Bloomberg News.

A key part of FuelCell’s growth strategy is forming partnerships with international companies that can deliver government and industrial customers . . . FuelCell’s biggest customer and biggest backer is South Korea’s largest steelmaker Posco, which ordered 70 megawatts of power plants in 2011 and agreed to buy an additional 120 megawatts in March.

Fuel cell companies can only become profitable – or, “gross margin positive” – by securing a sales pipeline with sufficient volume to achieve economies of scale.

FuelCell Energy expects to become profitable with a manufacturing volume of 80 megawatts annually, which will require expanding its annual pipeline about 30% or so. The company currently has a visible pipeline for about 182 megawatts of fuel cells systems. The company’s stock has increased in value by about 14% and net losses are expected to decline by more than half to $22.2 million this year, according to Bloomberg.

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I wonder if there is stock price manipulation game going on here, or at least a deceitful publicity stunt. FuelCell’s stock has been hammered (http://finance.yahoo.com/echarts?s=FCEL), and the numbers look fishy.

FCEL’s 17% owner, Korean steel company Posco, has recently ordered 190 megawatts, 2+ years’ worth of FCEL’s breakeven volume, and more than FCEL’s entire 182 MW “pipeline”. How much of the pipeline is rea, i.e., to parties besides owners, dealers, or California? (California’s hefty subsidies, on top of hefty federal subsidies, essentially make their handful of Walmart sales government-funded transactions. Given CA’s fiscal crisis, I doubt FCEL can count on CA much more.)

Posco’s expensive FCEL purchases, if consummated, would hurt Posco’s margins, but the excess cost would be spread over the life of the units, whereas a bump in FCEL’s stock price would benefit Posco sooner. Getting FCEL’s from its $0.95 close on May 23 (the day Bloomberg reported on FCEL’s volume strategy) to the 3-year-ago price of $4.59 would net Posco a $149 million gain; the 4-year-ago price would bring $296 million! Multiply those niumbers by 5 to calculate the prospective gain for the rest of FCEL’s shareholders.

FCEL’s sales to Posco wouldn’t have to be reported as related party-transactions. Given the stakes, I wonder if other FCEL insiders are giving Posco and/or FCEL valuable consideration in exchange for Posco’s purchases (or promised purchases).